In a recent judgement by ITAT Mumbai in the case of Volkswagen Finance Pvt Ltd v. Income Tax Officer (International Taxation) dt. 19.03.2020, it was held that:
“Where assessee had made payment to a non-resident, for an appearance made by him at Dubai (UAE) in a product launch event for promoting business of assessee in India, assessee would be liable to withhold taxes from payment so made as it was because of this relationship between event in Dubai and business of assessee in India that income had accrued and arisen to celebrity making appearance in Dubai launch event.”
Facts of the case:
The assessee before us is an Indian company. The assessee had made a payment of US $ 4,40,000 in respect of a celebrity appearance at Dubai, and the assessee did not withhold any tax from the said remittance.
The Assessing Officer (TDS) probed the matter in some detail. It was found that an entity by the name of Audi India, a division of Volkswagen Group Sales India Ltd, and the assessee jointly planned an event in Dubai for launch of Audit A8L facelift model (Dubai Audi A8L launch event, in short). The purpose of this event was launch of a new model of Audi car, i.e. Audi A-8L, for the Indian market, but the launch event took place, on 3rd
May 2014, at the Pavilion, Armani Hotel, Dubai.
Kim Productions Inc, a company incorporated in the USA, agreed to facilitate the appearance of Nicholas Cage (hereinafter referred to as ‘the international celebrity’) for three consecutive hours, and it was a consideration of this appearance, that the assessee paid US $ 4,40,000, plus other incidentals such as costs of two return first class airline tickets from Los Angeles, costs of stay and local transportation in Dubai, and costs of hair and make up of the celebrity.
In an undated, though signed, note filed during the course of hearing, the assessee has explained the event as follows:
“……This model is imported from Germany as a completely built unit with customization in line with customer’s requirements. It takes around 4-5 months for cars to be shipped from Germany to India. New model of Audi A8 was available in Dubai and hence the launch event was planned in Dubai for showcasing to potential customers. Majority of the customers were HNI individuals or existing customers already driving a different variant of the Audi car.
Volkswagen Finance Private Limited (VWFPL) is a captive finance Company. Audi India and VWFPL are part of the same group – Volkswagen group. Such promotional events generate enquires of potential customers who in turn would like to purchase Audi cars and finance the same from VWFPL. In order to support mutual business VWFPL was part of this event.”
However, on the ground that the event took place in Dubai, UAE, and the celebrity made his appearance at the event in Dubai, it was claimed that this event did not rise to any tax implications in India so far as the event and the celebrity appearance was concerned. The stand of the assessee was that no tax was deductible from this payment as the celebrity or his agent were not carrying out any activities in India, in relation to the appearance fees received from the assessee, and as such the appearance fee could not be treated as accruing or arising in India, or deemed to be accruing or arising in India.
It was also claimed that as the income was not taxable under the Income-tax Act, 1961, there was no occasion to claim any treaty benefits.
Observation of Tribunal:
So far as a non-resident taxpayer is concerned, under section 5(2), there are only two situation in which the income can be taxed in India-(a)first, when the income is received or is deemed to be received in India in such year by or on behalf of such person ; and (b) second, when an income accrues or arises or is deemed to accrue or arise to him in India during such year. It is not even the case of the Assessing Officer, nor does it emerge out of the material on record, that the income was received or was deemed to have been received by the celebrity or his agent in India. The case of the Assessing Officer thus hinges on application of Section 5(2)(b), i.e. when an income accrues or arises in India or is deemed to accrue or arise in India.
What essentially follows is that an income which, directly or indirectly, accrues or arises to a non-resident, though or from any business connection in India, is also chargeable to tax in India. Explaining the connotations of expression “through” appearing before the words “or from any business connection in India”, Explanation 3 to Section 9(1)(i) clarifies “that the expression ‘through’ shall mean and include and shall be deemed to have always meant and included ‘by means of’, ‘in consequence of’ or ‘by reason of’.” To put it in simple words, when an income accrues or arises to a non-resident outside India but by means of, in consequence of, or by reason of, any business connection in India, it will also be taxable in India under section 5(2).
As to what constitutes “business connection”, it has not been defined under the Income Tax Act, 1961, and, rightly so, because as Kanga and Palkhivala, in their oft quoted and well revered work “The Law and Practice of Income Tax” (7th edition; published in 1976) also put it at page 200, “the categories of business connection are incapable of exhaustive enumeration”. The definition of ‘business connection’, as set out in Explanation 2 to Section 9(1)(i) introduced by the Finance Act 2003, is also only an inclusive, and not exhaustive, definition.
This takes us to the question whether the income accruing to the international celebrity, on account of participation in Audi A8L launch event hosted in Dubai, has accrued or arisen, whether directly or indirectly, through or from any business connection in India-particularly when this event is specifically targeted for India based customers of a group of Indian entities- namely Audi India and its financing affiliate i.e. the assessee before us, is admittedly for “below the line publicity on internet, in press releases, news reports, social media” for the benefit of these entities, and the costs of the event is borne by these entities as expenditure in furtherance of their business interests in India.
Thus, appeal is dismissed.
To read full judgement CLICK HERE.
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